The car industry breathed a sigh of relief at Sunday night’s announcement of a revamped trade agreement between the US, Canada and Mexico. But if Donald Trump was hoping the deal would unlock new investment in US plants, he will be disappointed.
The president, who campaigned on restoring the fortunes of the US rust belt, sought to protect domestic car manufacturing from cheaper international competition. His solution — which replaces the old Nafta pact — largely reinforces the status quo.
Carmakers, looking at sales in the US market peaking, and additional spending challenges globally, welcomed the new agreements, but are not reaching into their pockets to pour more resources into the US.
Under the new rules, manufacturers will have to increase the amount of “local content” — parts sourced from the US, Mexico or Canada — that they install into the final vehicles from 62.5 per cent to 75 per cent.
This will probably pose a greater challenge to European and Japanese manufacturers in the US that import expensive parts such as engines from their home markets.
“The new regional value content requirements mean that automakers will not able to source parts as freely, so there will be added costs associated with vehicle manufacturing,” said Ivan Drury, a senior analyst at Edmunds.
Kristin Dziczek, head of industry, labour and economics at the Centre for Automotive Research, says the German brands VW, BMW and Mercedes face a greater challenge as they depend on importing engines and transmissions from their home markets.
The Alliance of Automobile Manufacturers, which represents about 70 per cent of new car and light vehicle sales, called the deal an encouraging development, adding: “The North American auto industry needs to have all three countries included in the agreement to realise the benefits and goals of a new pact.”
Joe Hinrichs, global operations president for Ford, said the new deal “will support an integrated, globally competitive automotive business in North America”. GM said it is “vital to the success of the North American auto industry”.
Didier Leroy, executive vice-president of Toyota, said his company’s plans were largely unaffected by the new rules. The Japanese carmaker’s plant in Georgetown, Kentucky is its largest in the world, producing about half a million vehicles a year.
“We have had a policy for many, many years to produce as much as possible locally for the local market,” he told the Financial Times on the eve of the Paris Motor Show.
Toyota spent $1.3bn upgrading its facility in Kentucky last year, as part of an anticipated $10bn investment into the US, one of its most important markets. The plans were put in place before Nafta discussions started, and not affected by their outcome.
In all, Toyota makes about 70 per cent of its cars for the North American market in the three nations, only importing “niche” model lines, Mr Leroy said.
Toyota has expanded its Canadian plant, and is increasing its Mexican capacity as well. Had Nafta collapsed, the business would have been severely hit. As it is, the company will adjust to the new rules and likely carry on much as before.
“We have to deeply study the exact content . . . but it is an important step to reduce uncertainty for the future,” Mr Leroy said.
Additionally, carmakers will have to guarantee that 40-45 per cent of workers in their facilities earn at least $16 an hour — a wage designed to whittle away the appeal of Mexican labour costs.
But it will be all but impossible to extricate Mexico or Canada, which together build a quarter of the cars sold in the US, from the equation altogether.
“Given decades of supply chain evolution based on Nafta, a substantial portion of the vehicles assembled within the US are dependent on components from Mexico and Canada,” said Jonathan Smoke, chief economist at Cox Automotive.
Both measures will also push up costs for manufacturers that are already paying more for raw materials hit by Mr Trump’s tariffs.
Jim Hackett, Ford’s chief executive, said last week that increased steel prices from US producers had cost the company $1bn, while Goldman Sachs has predicted a similar bill for GM.
In addition, carmakers are facing falling sales, shifting consumer trends away from smaller cars and the need to invest in expensive new technologies such as electric vehicles or self-driving systems.
All of these sap investment that could be spent on hiring more US workers.
In the US, car sales slipped in 2017 and are expected to fall this year and next.
“It’s hard to imagine many new jobs in the US being created because of the US-Canada-Mexico trade deal,” said Michelle Krebs at Autotrader.
“The pie is still healthy but is shrinking a tad. The industry doesn’t need more capacity.”
This article has been amended to correct the job title of Joe Hinrichs
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